right of first offer

3 min read 17-03-2025

A Right of First Offer (ROFO) is a contractual agreement that gives one party the exclusive right to match a third-party offer before the property or asset is sold to someone else. This isn't a right to buy the property at any price, but rather a right to match a bona fide offer from a third party. Understanding its nuances is crucial for both buyers and sellers.

How a Right of First Offer Works

Imagine you're selling your business. You grant a ROFO to your long-time employee, Sarah. A third party, Acme Corp., then makes an offer to buy your business for $1 million. Before you accept Acme's offer, you must first offer the same terms (price, conditions, etc.) to Sarah. She then has a specified period (often 30-60 days) to decide whether to match the offer.

Trigger: A bona fide offer from a third party triggers the ROFO. This offer must meet certain criteria, outlined in the agreement, to be considered valid.
Matching the Offer: The holder of the ROFO must be able to match the terms exactly. This includes price, financing terms, closing date, and all other conditions. They can't offer slightly less or different terms and still claim the ROFO.
Time Limit: The ROFO agreement specifies a time limit for the holder to accept or reject the offer. Failing to respond within this timeframe forfeits their right.
Not an Obligation to Buy: Importantly, having a ROFO doesn't obligate the holder to match the offer. They can choose not to exercise their right.

Common Uses of a Right of First Offer

ROFOs are used in various situations, often to protect a party's interest in an asset. Here are some examples:

Business Sales: As illustrated above, protecting key employees or investors.
Real Estate: Giving a neighbor or tenant the first chance to purchase a property before it goes on the open market.
Mineral Rights: Allowing existing leaseholders the opportunity to match new exploration bids.
Intellectual Property: Securing the right to license or purchase an invention before it’s offered to others.

Advantages and Disadvantages of a Right of First Offer

For the Holder of the ROFO:

Advantages: Secures a preferred position to acquire the asset. Provides a measure of control and predictability.
Disadvantages: May miss out on a better opportunity if a more favorable offer comes along. Requires being prepared financially and legally to act quickly.

For the Party Granting the ROFO:

Advantages: May receive a better price due to competition between the ROFO holder and other potential buyers. Creates a sense of loyalty and commitment.
Disadvantages: May limit the pool of potential buyers, resulting in a lower overall price than if it were sold on the open market. Requires careful drafting to prevent disputes.

Drafting a Strong ROFO Agreement

A well-drafted ROFO agreement is essential to avoid ambiguity and future disputes. Key elements to include:

Clear Definition of the Asset: Precisely describe the property or asset subject to the ROFO.
Triggering Event: Clearly state the conditions that trigger the ROFO (e.g., a written offer from a third party exceeding a certain amount).
Matching Rights: Specify exactly what the ROFO holder must match (price, terms, conditions).
Time Limits: Define the timeframe for the ROFO holder to exercise their right.
Dispute Resolution: Include a mechanism for resolving disagreements (e.g., arbitration).

When to Use a Right of First Offer

A ROFO can be a valuable tool, but it's not always the best solution. Consider using a ROFO when:

You want to favor a specific party for strategic or personal reasons.
You expect a high degree of interest in the asset.
You want to maintain a strong relationship with the ROFO holder.

However, if you need to sell quickly or maximize your sale price, a ROFO might restrict your options. It's wise to seek legal counsel before entering into a ROFO agreement to ensure it aligns with your specific needs and objectives.

Conclusion: Weighing the Pros and Cons

The Right of First Offer offers a unique way to manage the sale of assets, but its effectiveness depends on careful planning and a well-drafted agreement. Understanding the advantages and disadvantages for both parties involved is crucial before entering into such an agreement. Always seek legal advice to ensure the ROFO protects your interests.